All modern trusts can trace their origins back to the laws of equity developed by the English courts over the centuries. At their most simple, a trust is created where assets are 'entrusted' by a person known as a settler to trustees for the benefit of named or unnamed beneficiaries. The initial use was primarily to control how, where and to whom assets would be distributed but later also became closely associated with tax mitigation, estate planning and indeed asset protection.a In more recent times, trusts have became more regulated through more and more sophisticated case law and statutes but at their core have kept their original purpose. However, aggressive anti-avoidance provisions have resulted in many tax savings being compromised at least in the developed common law countries such as the UK, United States, Canada, Australia, Ireland and New Zealand. They nevertheless remain very powerful tax planning 'tools' but always require careful drafting (if written) by suitably qualified lawyers and/or chartered accountants.
As stated, the concept of a 'trust' is unique to common law or English speaking jurisdictions. Historically, it developed from the English laws of equity and sought to separate the creator of the trust, known as the settlor, from specified real or personal property usually for the benefit of future heirs and/or to ensure that any future dispositions would be made in a manner generally in keeping with the original intentions of the settlor. Once a settlor has decided what property he wishes to transfer to the hypothetical trust (normally a complex written document) he must decide upon its administrators, the 'trustees'. It is vital to understand that these must have full autonomy to independently manage and control the transferred property in favour of either known or unknown beneficiaries. If full autonomy is not granted then it could be claimed that the trust was not settled and therefore, was not properly constituted.
If this happened then the settlor would still be legally deemed the owner of the trust assets - defeating the-raison d'étre behind the trust in the first place. Obviously, given this requirement to totally deny the Settlor direct control over what were formally his/her assets demands great 'trust' in the trustees. Fortunately, Trustees are not totally free of control since they must normally strictly adhere to the trust instrument unless such instrument involves an illegal act or is in breach of some current public policy. Certainly, it is normally open to interested or potentially interested parties, to seek the assistance and interpretation of the applicable courts.
In almost all common law jurisdictions, they have reserved the right to vary, abrogate or otherwise change the terms and conditions in a deed of trust including the originally designated 'trustees' and/or beneficiaries. Notwithstanding the above, it must be understood that the courts in, most common law jurisdictions will do everything in their ability to carry out the wishes of the settlor and, bar some malfeasance, are unlikely to interfere with a deed of trust.
It is clear that all trustees implied through circumstances or clearly designated, have a fiduciary duty to act honestly and in good faith for the benefit of the trust even if such responsibility denies them personal opportunities. The best analogy is probably afforded by the fiduciary duty owed to a shareholder by a company director.
However, unlike a director a trustee must not be directly answerable to any third party since this would infer that the trustee was in reality a mere 'nominee' acting as a catalyst for someone else. If the settlor was the instructing party then the trust would not have legally settled. Further, unlike most dispositions a trustee is not the direct legal recipient of the transferred assets. In fact, whilst the trustee has the right to deal with the aforementioned as if he was the owner - subject to the deed of trust conditions and perhaps other Trustees - he cannot use them for his own personal use and, as a corollary, no third party creditor can sequestrate trust assets simply because of a dispute with a trustee.
In other words, proprietary title is in limbo despite the existence of trustees who are responsible for the same as if they were directors and/or shareholders in a company. At the time of the creation of the trust instrument, the deed of trust, it is common that the settlor provides the trustees with a 'letter of wishes' which, as its name implies, express's the wishes and desires of the settlor at the time of the original disposition.
This 'letter' is not meant to be slavishly followed by the trustees since to do so would threaten the independence of the trust but rather it is 'deciphering' documents meant to assist the trustees carry out their independent functions. Of course, it does carry weight and should be read in conjunction with the deed - these often being standardized documents - but it should never result in the settlor having de facto control. In recent years there has also been a growing propensity to use 'protectors' as an additional safeguard against any wrongdoing by trustees. In most cases, the protector will be a lawyer or accountant known by the settlor who will be granted co-signatory rights, together with the trustees, over the trusts bank account facilities. Of course, a protector also should never be the settlor or anyone else too closely connected with the trust since this could, once again, compromise the independence of the trustees. Certainly, various obiter statements in English cases appear to be ascribing 'protectors' with fiduciary duties akin to those of trustees (See I. R. C v. Schroeder 1 983 STG 480) Therefore, for safety reasons any modern trust should, if employing protectors, ensure that they are independent from the settlor or other relevant parties.
What type of Trust?
Whilst there are many different types of trust employed in the world's common law jurisdictions, it is the discretionary trust, which finds most favour in the offshore trust areas. This type of trust not only ensures that the settlor has divested himself or herself from the requisite assets, but it can also provide significant benefits to the intended heirs/beneficiaries. The reason for this is that whilst it is known that there will be, of course, beneficiaries, a discretionary trust leaves the amount of capital and/or interest to be paid to the normally unnamed beneficiaries totally at the discretion of the trustees. In effect, this allows the trustees the ability to control when and what type of payment should be made and hence, will ensure the most favourable tax consequences for the beneficiaries. In précis, trusts can be broken down into 3 constituent types with the 4th type, an asset protection trust (APT), simply being a variation of an 'Accumulation and Maintenance Trust'
- An 'Interest in Possession' Trust: As its name implies this provides for a beneficiary to have a distinct right to the income from a particular part of the trusts capital assets. The capital asset may or may not be passed on to the beneficiary;
- A 'Discretionary' Trust: This gives the trustees total discretion to decide, subject to their fiduciary duty, how, when and to whom the income, and perhaps capital, of a trust is transferred;
- An 'Accumulation and Maintenance Trust': This is basically a combination of the other two trust types. Generally, it will start as a discretionary instrument but will have provisions to change into an interest in possession trust normally when the beneficiaries have reached a particular age;
- An 'Asset Protection Trust' (APT): Unlike other trust mechanisms, an asset protection trust (APT) does not necessarily seek to reduce the settlor's tax responsibility. In fact, for US nationals this could have significant negative consequences. Rather, 'its purpose is to act as a form of insurance for high-risk individuals, primarily those in the medical and legal professions, in litigious jurisdictions like the USA. Before establishing such a trust for an American, it is essential to confirm that the basic mechanism would be accepted as bona tide by the I.R.S. (Internal Revenue Service). Jurisdictions, which have special APT legislation, include Cyprus and the Cook Islands.
WHO can use a trust?
There is nothing to prevent anyone from setting up a trust but if tax exposure is also an issue advice should always be sought from professionals especially for those based in 'common' law countries such as the US, UK or Ireland
Until recently, there were virtually no restrictions on who could make effective use of a trust. However, both common law and statute have severely restricted the legal employment of trusts for those tax domiciled in countries such as the United Kingdom and the United States. In the case of the US, the one notable exception is the asset protection trust (see below). Notwithstanding these restrictions, trusts are still very valuable weapons in the tax planners' arsenal since virtually no civil law country has any effective anti-trust legislation. In particular, they can often be used to avoid Continental 'forced heirship' provisions.
Examples - Traditional Uses for Trusts
'A' has a wife 'B' and 2 children 'C' (Age 10) and 'D' (Age 18). 'A' wishes to keep the family assets for the benefit of future generations; however, 'D' has shown himself to be frivolous and incapable of acting in the best interests of the family. In addition, 'A' wants to ensure that should he die his wife 'B' will have the right to remain in the family house.
A trust should be prepared outlining the long-term objectives of 'A' either during his life, an inter vivos trust, or upon his death by means of a will. The instrument could provide for 'B' to have a life interest in the family home with this interest reverting back to the trust or to 'C' and/or 'D' depending on circumstances. In fact, in such a situation it might be decided to give the trustees adequate 'Discretion' to take account of all possibilities. During the interim period such a trust would generally empower the trustees to pay a certain amount to 'B', 'C' or 'D' to cover all day-to-day expenses. Other possibilities would include provisions that 'C' or 'D' should directly inherit a given proportion of the trust's assets on the attainment of a given age or circumstance i.e. upon marriage. Obviously, the possibilities are endless but the great advantage is that once an appropriate trust has been created, 'A' will have some control over the disposition of family assets even from the grave! Obviously, the first example only takes into account the most simple of trust objectives.
However, the trust soon developed as a very effective 'tool' for circumventing, in particular, capital gains and inheritance taxes. The concept being that if for example, 'C' and 'D' above did not directly receive any pecuniary benefit, then ho could a government seek to tax them. Of course, once a trust did make a direct disposition 'C' and 'D' would have to pay taxes but remember that the trustees would, if we accept the discretionary model, be able to control the amount and time of the payment to ensure the most tax efficient result.
It goes without saying that a trust is a taxable entity, however, traditionally and logically it needs only to pay income and not capital gains or inheritance orientated taxes. Remember, in common law whilst assets may have been transferred to a trust the said assets are not owned by anyone until future dispositions have been made. In other words, it was the ideal 'holding' vehicle and could considerably postpone any tax liability.
Unfortunately, as will be shown later on, many of the advantages of trusts have been lost as a result of aggressive legislation in common law jurisdictions. However, possibilities still exist for those in some civil law countries and also for non-tax objectives such as asset protection.
The Rule against Perpetuities
In the above examples it can be seen that significant powers of control over the future use of assets were granted -to the original Settlor, however, from a logical point of view this could have a disastrous effect on the availability of capital for future generations. To prevent this, most common law jurisdictions have developed specific limitations on the perpetual control of trust assets. In the United Kingdom, a trust cannot remain active for more than 80 years after it has been settled or 21 years after the demise of an identifiable person who was alive at the time of the creation of the said trust.
Trust Uses & Applications
I n common law countries the use of onshore trusts for those locally domiciled and resident, at least for tax mitigation purposes, has greatly diminished. In the United Kingdom, for example, there has been a rash of legislation in recent years (such as S.739-740 of The Taxes Act, 1988, S. 110 of The Parliament (Finance) Act, 1989 and S. 87-97 of The Taxation of Chargeable Gains Act, 1992) - which has prevented the use of tax avoidance mechanisms unless there existed a genuine commercial reason, ascribed British residence to foreign trustees and made settlor's personally liable for their trusts capital gains. However, as will be discussed later, there can still be considerable advantages available for those not domiciled, even if resident, in countries such as the United Kingdom.
Today, the majority of tax mitigation trusts are established outside of high taxation common law countries like the United Kingdom. The principle reason is that 'tax friendly' jurisdictions such as Jersey and the Isle of Man provide respectability, greater confidentiality and hence protection against the ubiquitous reverse burden of proof principle employed in most high tax countries. If one on the other hand is domiciled, or perhaps resident, in a civil law jurisdiction one must be careful that trusts are recognized.
The International Recognition of Trusts
The main problem with the international recognition of trusts is that civil law countries have difficulty coming to terms with the concepts involved. Certainly, the idea of property ownership being in limbo for a given duration is alien as is that of beneficial, or true, ownership not necessarily resting with the shareholders. In addition, most civil codes (at least in Europe) adopt the legitima portia principle; a 'principle' which seeks to prevent a free disposal of one's assets in favour of guaranteeing specific proportions to ones next of kin. These facts, together with a reluctance to tie up capital and/or property for future generations, can result in civil law countries refusing to recognize trusts. Nevertheless, as a general rule Western European civil law jurisdictions will often accept a validly constituted foreign trust so long as its enforcement does not cause a breach of indigenous law.
The Hague Convention 1984 Effective 1st of January 1992
In an attempt to introduce greater harmony between the laws of common and civil law jurisdictions an international meeting was held in the Netherlands. This set out to establish the acceptance of certain principles, which should be applied by the courts of the signatory nations. To date, it has been ratified by the United Kingdom, Canada, Australia and, more surprisingly, Italy. In respect to the latter this should provide greater certainty for those with trust assets in this jurisdiction.
The attributes to be ascribed to a trust are elucidated in Article 2, however, it will be noted that they may still differ from those of an established trust jurisdiction. For example, it is quite common for English and Irish courts to imply a trust even if there are no written documents.
Article 2 'Trust Characteristics' as laid own under The Hague Convention 1984
- It is accepted that a trustee has no direct proprietary interest in a trust and that it is not part of his own estate;
- Notwithstanding the above, title to the trust assets can be in the name of the trustee or held on his behalf by another;
- A trustee has a fiduciary duty to manage, dispose or employ trust assets in the manner prescribed by both the trust instrument and applicable law.
Trusts can transfer legal ownership from a settlor to the trustees without passing a direct beneficial interest in the trust property. Trusts can provide an effective mechanism of distributing trust capital and/or income to minimize tax consequences for beneficiaries. Trusts, can prevent immature or frivolous beneficiaries from dissipating family assets and, therefore, 'protecting' future generations.
Trusts may be able to prevent the application of the legitima portia principle in respect of assets located in civil law jurisdictions. Trusts may still be very useful for tax mitigation purposes especially for those not domiciled in a common law area where anti-trust legislation may exist. The use of 'Protectors' can significantly reduce problems caused by dishonest or incompetent trustees.
Many of the traditional tax benefits no longer exist for those resident and domiciled in common law countries because of anti-trust legislation. In the United States such benefits are not normally available even for those merely resident. There may be difficulty in getting a civil law jurisdiction, particularly in Eastern Europe, to accept the validity of a trust instrument even if this does not cause any conflict with indigenous laws. By definition the employment of a trust must result in the former 'owner(s)' of the trust property losing direct control over their former assets. Whilst the settlement of a standard format trust may not be prohibitively expensive the maintenance may be if the trustees have to play an active role and/or have specialist skills. All trusts tend to tie up capital and are generally less productive and flexible than directly controlled mechanisms. The rule against perpetuities is almost universally employed and will result in the trust having a finite duration.
Asset Protection Trusts
Asset Protection Trusts (APT's) can protect your hard worked for assets but only if carefully set up in the right place and at the right time - Read on to find out more!
In view of the topical nature of asset protection trusts (APT's), it has been decided that it should be dealt with separately from general or traditional trusts. In basic structure, an APT is merely a specialist vehicle protecting the assets of those in volatile business and/or professional areas. It is perhaps not surprising that the main market for such structures is in the United States where the litigious nature of its society has resulted in crippling indemnity insurance for doctors and lawyers, an ever increasing spiral of court awards, together with significant and growing probate problems. For these reasons this Chapter has been written with American citizens and residents in mind. However, the basic concepts can be extrapolated to benefit those in other jurisdictions.
A Non US Asset Protection Trust - Why?
There is no doubt that the United States is one of the world's most sophisticated trust jurisdictions. Certainly, trusts can be established to separate a settlor/grantor from chosen assets and such a separation may well be valid and of some use. However, it is suggested that even the best thought out indigenous trust will suffer from inherent limitations, including: (i) that local trustees can be subject to direct pressure from United States courts and can be readily subject to a subpoena to supply information on the trust assets, (ii) it is far easier for a U.S. trust under creditor attack to be set-aside than one established abroad, (iii) confidentiality is very difficult to maintain, and (iv) attacking a foreign APT will cause significant difficulties and delays, the cost of which would probably prevent frivolous or vexatious creditor actions. At this stage, it should be noted that foreign APT's should generally not be established to obtain tax advantages. In fact, all Internal Revenue Service rulings are normally rigidly adhered to, with all income received by the named or unnamed beneficiaries being declared on the appropriate tax returns. The reason that such emphasis is given to keeping the tax status quo, is that not to could create severe problems with the IRS, resulting in the legality of the original disposition being called into question. Obviously, if that happened then it is possible that the sought after protection of the trust would dissipate. It should further be noted that all reports to the IRS are strictly confidential and that neither it nor the Treasury disclose information to the public.
- Protects your assets from unsubstantiated claims;
- Affords a high level of privacy;
- Very difficult for a U.S. court to enforce judgement;
- The fact that the trustees existence is not in the public domain;
- The Trustees' need not be U.S. residents;
- The foreign trustees should be the only legal entities with specific knowledge and control over the trust assets and investments;
- Banking should be outside the U.S. in an area with established confidentiality;
- The offshore trust will be able to create its own foreign investment corporations that need not declare end beneficial ownership;
- The trust could be an ideal mechanism for offshore investments. Such investments providing extra security for the simple reason that the assets will be outside the U.S.;
- An offshore trust can have an 'anti-duress' or 'flee' clause to prevent any U.S. based trustee/protector from acting as a catalyst for a U.S. court order.
Requirements for a Valid Disposition
In most States in the United States it is recognised that there is a clear distinction between probable and possible future creditors. Obviously, if at the time of the settlement it was probable that there would or could be creditor action, it is likely that a U.S. court could seek to set-aside the trust. This would not be the case however, if it was a mere possibility that there could exist a future creditor action but that at the time of the original disposition it could not have been reasonably foreseen or expected. Then a court, subject to sufficient private assets being maintained by the Grantor to meet all reasonably foreseeable debts and/or liabilities, would be very unlikely to ascribe any malfeasance to such an act (See Hurlbert v. Shakleton 560 SoZd 1276, Florida Appeals Court, 1990). Of course, each State must be considered individually, nevertheless, the following are generally considered universal:
1. There must not be any fraudulent intent at the time of the disposition;
2. There must be no future fraudulent intent;
3. The Grantor must maintain sufficient assets to meet all existing debts and liabilities, including those that could be reasonably expected in the future
Separating Ownership from Use
A number of US law firms employ limited partnerships as a method of providing de facto control to Grantors over transferred APT assets. Of course, it could be argued on basic trust principles that such empowerment will prevent the trust assets from being legally transferred to the trust instrument. However, at present there seems to be little case law to provide any definitive answers. The logic of the law firms concerned appears to rest on a combination of separating "ownership" from "use" and reliance on the anonymity of the structures employed. To many clients these semantics are of little concern provided they feel comfortable and secure with the "veil" of ownership. Nevertheless, many lawyers feel that whilst considerable arguments could be put forward such structures must go against the spirit of trust law.
Diagram - Separating Ownership from Use
Obviously in establishing a foreign APT one has to be very careful as to which jurisdiction is employed. With the growing use of these mechanisms many countries have introduced special asset protection legislation to attract the APT client. However, it should be noted that it is not merely the APT legislation that should be considered but also the general reputation of the territory concerned. Also, there is an argument that it may be better to use an ordinary discretionary trust in a highly respectable and conservative trust jurisdiction such as Jersey. The logic being that such structures will not immediately draw third party attention to the intended modus operandi. Nevertheless, the general consensus is that it is better to go for areas which have specifically introduced legislation to 'protect' grantors/settlors from creditor actions.
Example Jurisdictions Where APT Legislation Exists
The Cook Islands
The Cook Islands are located in the South Pacific with close historical connections to both the United Kingdom and New Zealand. The legal system is based on English common law whilst company legislation is primarily based on the New Zealand Companies Act, 1970-1971. The population is about 21,000. The capital is Rorotonga (population 8,500) economically and socially stable. Asset protection trusts are governed by the International Trusts Act, 1984 (Amendments 1989 and 1991). To benefit from this legislation one must either have an existing company (foreign or domestic) registered under the International Companies Act (1981-1982) or a direct trust. The trust must be registered with a local and licensed trust company and have an approved trustee. The beneficiaries cannot include local residents.
Trust Law Observations
Indigenous legislation has specifically modified traditional English and New Zealand common law principles in order to make the jurisdiction more attractive to international tax and asset protection advisors. Some of the more interesting of these modifications include:
- It is possible to circumvent the rule against perpetuities for up to 100 years.
- A local trust will not be deemed invalidly settled simply because it has not satisfied the rules and regulations of the Grantors' place of domicile and/or residence.
- A Grantors bankruptcy will not invalidate the trust, unless it can be shown by a creditor 'beyond all reasonable doubt', that the trust was settled with a fraudulent intent AND that as a direct result of such settlement he was unable to meet the creditors demands.
Basic Characteristics And Offshore Asset Protection Trust
To ensure the effective operation of an APT, it is vital that the correct people in the correct jurisdictions are instructed to act in the trustee and protector capacities. In particular, it is essential to remember that the grantor or settlor should not have any direct control over the trust assets and that trustees are seen to have and actually do have full autonomy and do not slavishly follow the grantor instructions or a 'letter of wishes'. Once again, if one is not careful, it is possible that a court could deem that the trust had not been legally settled. Examples of some of the most important characteristics would include:
- The trust should be registered by a non-US firm to ensure that both the US courts have no jurisdiction and that confidential 'discussion' or 'advice' documents cannot be sequestrated. Remember, that whilst an attorney will benefit from professional privilege, few attorneys have direct connections with foreign trust firms and may use indigenous agents;
- The trustees should be non-US residents to prevent direct pressure being implemented by creditors and/or the US courts. In addition, the foreign trustees must be the only entities with full information on trust assets and investments and with complete and independent control over the aforementioned;
- Any US based 'protector' should be a trusted attorney to ensure 'professional privilege';
- It is generally recommended that the trust should be of a discretionary nature to allow for flexibility;
- The trust should have an 'anti-duress' or 'flee' clause to ensure that the U.S. courts cannot seek to apply indirect pressure on either the grantor or protector by holding them in contempt of court. In other words, should a US court try and enforce a disclosure judgement against the above, and then the 'anti-duress' clause will come into effect and prevent the trustees from following such instructions. Normally, this would take the form of a specific clause in the trust instrument, preventing the foreign trustees from acting on any advice/instructions that they believe were either made under duress or could cause a breach of their fiduciary duty. The fiduciary duty, of course, being that expected from trustees in their place of residence and/or that of the residence of the trust, but specifically not that expected from a U.S. resident trustee.
- The trust should maintain all bank account facilities outside the US, preferably in an area with banking confidentiality. The account need not necessarily be in the same location as the trust.
- Liquid assets should be maintained outside of the US whilst as many investments as possible should likewise be out of the country.
- To keep as much confidentiality as possible Limited Liability Companies are often employed to directly own US based assets. In States such as Delaware it is only necessary to register a Certificate of Formation which need not disclose any 'ownership' details. The only people that will be aware of the trusts ownership and control of the asset(s) will be the IRS. The specific reason for a LLC rather than an incorporation is that the I.R.S. treats these entities for tax purposes as 'partnerships' and hence will not create a separate requirement to file accounts at the end of the financial year (See Delaware Limited Liability Act, 1992, and Revenue Rulings 93-38, 1992 ). Of course, notwithstanding the tax treatment, the LLC is still a genuine limited liability company providing the best of both worlds.
Digram - Basic Asset Protection Trust
- A Grantor can retain wide powers over the transferred assets without fear of the trust being deemed invalid under Cook Islands law. However, note that this very power could cause difficulty if the Grantor resides in the same jurisdiction as his assets. The normal preventative measure would be to introduce an 'anti-duress' clause into the original settlement;
- The fact that other jurisdictions do not recognise indigenous trust law or that the employment of the trust could circumvent civil law concepts such as the 'legitima portia' principle will not be cause to set the trust aside;
- Even in cases where it can be proved that the trust was established with a fraudulent intent,this will not invalidate the trust, but mean that the proportion of the assets necessary to satisfy the applicable creditor will simply be paid, with the balance continuing to enjoy full trust protection;
- All professionals, including bankers and government bodies, are under a strict code of confidentiality;
- All APT's with non-resident beneficiaries have no local tax obligations, although government duties are payable
The fourth largest of the Mediterranean islands, politically and ethnically divided between Greeks in the South and Turks in the North. However, as a result of the invasion by Turkey in 1974, only the Greek Republic of Cyprus is recognised by the United Nations. It is this part of the island which can afford significant trust benefits. The population is approximately 700,000. The capital city is Nicosia. Since 1974, the island has been relatively stable and is actively seeking membership of the European Union. The legal system is based on English common law, with company law being an almost direct extrapolation from the British Companies Act of 1948.
Asset protection trusts are governed by The International Trusts Law, 1992 and are quite separate from indigenous trust law. To benefit from this legislation neither, the grantor nor the beneficiary must permanently reside in Cyprus. However, the trust must be registered with a local and permanently resident trustee. Foreign trustees may be appointed, but at all times there must be at least one local involved.
Trust Law Observations
As with the Cook Islands, Cyprus has deliberately established APT legislation to attract international tax and trust advisors. The proximity to mainland Europe and its relative state of development, in comparison to other competing jurisdictions, may prove attractive. Nevertheless, there do not exist, the same provisions to allow for the almost direct control of trust assets by the Grantor. Specific benefits afforded by a Cypriot APT would include:
- A trust can exist for a maximum time period of 100 years and, thereby, circumventing the traditional rules relating to perpetuities;
- Unlike indigenous trust law, there are no restrictions on the type of legal investments that can be made, subject only to the standard fiduciary responsibilities;
- A local trust will not be invalidly settled simply because it has not satisfied the rules and regulations of the grantors' place of domicile and/or residence;
- A grantors bankruptcy will not invalidate the trust, unless it can be shown by a creditor that within two years of the creation of the trust and 'on the balance of probabilities', that at the time of the transfer or disposal of the trust assets he was a creditor and that there was an intent by the grantor to defraud;
- The fact that other jurisdictions do not recognise indigenous trust law or that the employment of the trust could circumvent civil law concepts, will not cause the trust to be set aside.
- Cypriot International trusts are completely free of all local taxes, but have to pay an initial registration fee of about US$2,000.00.
- Cyprus has strict laws relating to confidentiality and any professionals concerned must not release information to any third party, unless so ordered by a Cypriot court.
Gibraltar has been a British Colony since the Treaty of Utrecht in 1713 and is strategically located at the entrance to the Mediterranean between Spain and Morocco. Although it has been part of the European Union since 1973, it is not subject to VAT. The population is 35,000. Gibraltar's legal system is based on English common law, with company law governed by the Companies (Amendment) No.2 Act, 1992. Asset protection trusts benefit from the Bankruptcy Amendment Ordinance, 1990, with amendments thereto by the Bankruptcy (No.2) Ordinance of the same year. As with most similar jurisdictions, tax exemption will only apply if the Grantor and beneficiary (ies) are non-resident and the trust income derives from external sources. In addition, it should be noted that the trustees must be licensed and must register the trust with the Regulatory Bodies, together with a payment of UK£500.00. Also, such trustees are legally obliged to make specific inquiries as to the Grantors solvency and/or anything which may indicate malfeasance. They are required to obtain professional indemnity insurance. The register is not open to members of the public.
Trust Law Observations
Whilst Gibraltar has specifically introduced legislation to entice APT's, it is nevertheless trying to protect its reputation which suffered from a number of scandals in the 1980's. To this end, both trusts and companies are more regulated than in many other jurisdictions. However, it is uncertain what effect this could have on potential clients. Specific benefits afforded by Gibraltar would include:
- A trust may have a life span of up to 100 years circumventing the normal limitations as to 'perpetuities';
- Income from the trust may also be accumulated for a 100 year period;
- A grantors bankruptcy will not invalidate the trust, unless it can be shown by a creditor that the settlement was made when there existed an actual or contingent liability and that the grantor had "notice of such a claim or of facts or circumstances which mayrender him liable to such a claim ". In Gibraltar's legislation, thegrantor will not be protected by attesting that he had no 'intent' to make a settlement when insolvent or potentially insolvent. The test will be that of the average 'reasonable' man
- Trustees are under a strict code to protect client confidentiality, unless subject to a court order;
- Gibraltar has implemented most of the provisions of the Hague Convention on the law applicable to trusts (1984). In particular, it should be noted that Article 15 may prevent otherwise valid dispositions from being enforced if it effects: (a) minors, (b) creditors in matters of insolvency, (c) real and personal property relating to marriage, (d) innocent thirdparties acting in 'good faith' and (e) various succession rights;
The SCF Group does not provide tax planning advice save where there is a specific and agreed remit and issued 'letter of engagement'. All clients are therefore advised to ensure that their particular tax circumstances have been confirmed before proceeding with any corporate structure